A registered representative (RR) is approached by a long-time client, who is a close family friend, requesting a loan of $5,000 for an unexpected medical expense. The client offers to sign a promissory note and repay the loan with interest within six months. What is the RR's most appropriate action under FINRA rules?
- ADecline the loan, as lending to clients is generally prohibited, even for family friends.
- BSuggest the client take a loan against their investment portfolio instead of borrowing from the RR.
- CApprove the loan, but only if the firm provides prior written approval.
- DGrant the loan, as it's a small amount and to a close family friend, and document the agreement.
Show answer & explanationAnswer & explanation
Correct answer: A. Decline the loan, as lending to clients is generally prohibited, even for family friends.
FINRA Rule 3240 (Borrowing From or Lending to Customers) generally prohibits RRs from borrowing from or lending money to customers. There are limited exceptions, primarily for immediate family members or institutions, but a 'close family friend' typically does not fall under these exceptions. Therefore, the RR must decline the request to comply with the rule.
Why the other options are wrong
- B. While this might be a viable financial option for the client, it does not address the RR's obligation regarding the client's request to borrow from them.
- C. Firm approval is only possible under very strict, limited exceptions (e.g., immediate family, financial institution), which a 'family friend' typically does not meet.
- D. This would be a violation of FINRA Rule 3240 and could lead to disciplinary action.
Lending to Clients (FINRA Rule 3240)
FINRA Rule 3240 generally prohibits registered representatives from borrowing money from or lending money to customers, with limited exceptions for immediate family members or customers that are financial institutions, provided the firm has written procedures and grants prior written approval.
- Prevents conflicts of interest and exploitation.
- Strict exceptions apply (immediate family, financial institutions).
- Requires prior written firm approval for exceptions.
Memory trick: No loans for clients, unless family's in the plans.